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The Smoking Gun Of Spain's Unsustainability
Authored by Michael Cembalest, JPMorgan CIO,
The Spanish Prisoner: why the adjustment in Spain looks like it will eventually fail
The people of Spain are prisoners of an economic adjustment that looks like something dreamed up by Torquemada. Let me explain. I was discussing Spain with a colleague, and I mentioned the ongoing collapse in Spanish labor compensation.
He cheerfully connected the compensation decline with an improvement in Spain’s competitiveness, and offered the improvement in Spain’s trade balance as proof. A lot of the recent compensation decline had to do with public sector workers (who export nothing) and not private sector ones, but let’s assume he’s right that private sector wages are impacted as well. Is this a sustainable way to regain competitiveness? Historically, balance of payments crises brought on by competitiveness gaps were almost always addressed in part through currency devaluation, as shown in the table. Let’s go to the archives.
The 2008-2012 recovery in Spain’s trade balance didn’t happen as quickly as the other episodes, but at least the gap closed, right? Not so fast. Spain’s exports have been growing, but its recovery is the worst of the bunch, indicating that trade improvement relies heavily on an import collapse and 25%+ unemployment. The last chart is the smoking gun: the growth dynamics of the current Spanish adjustment are nothing short of terrible in an historical context.
One could also look the collapse in capital spending in Spain, down at a 28% annual rate in Q4 2012 even when excluding construction. Did inflation spike in prior episodes after devaluation? Yes, but real GDP measures improvement after taking inflation into account, which is why the last chart tells you most of what you need to know. Torquemada the Inquisitor would be impressed with the pain that Spain is inflicting on itself. The bad news for Spanish labor markets isn’t over: most measures of Spanish competitiveness show that only half the gap has been closed vs Germany. I don’t see how this can be sustained indefinitely, even with the rally in Spanish sovereign and bank spreads, and with looser fiscal policy sanctioned by the EU. Without a true fiscal transfer union in Europe, caveat emptor in its Periphery, unless prices for stocks, bank loans and real estate are sufficiently cheap.
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Please. Humanity isn't just another unsustainable ponzi, it's the unsustainable ponzi. Plenty of consumers for all these goods etc. The problem is everyone is fucking broke.
He makes a sound point about devaluation.
Crazy as it seems, I know people buying Spanish real estate, but only in the most desirable areas. Some foreign buying is probably the only short term help that market will get. A devaluation makes it rational to buy, and will make the current flippers look like the fools they are.
Fair enough, but in order to actually do anything, like have a vibrant economy, you need energy. Just getting up in the morning and keeping a single heart beating requires energy. energy costs are not devaluing any time soon. Do these locations have vibrant economies, will they when the unemployment rate for the 20-35 crowd is 50%? Seems kind of stupid to buy property unless you want a front seat for the civil unrest.
"25%+ unemployment."
Are you saying 75% of Spaniards is actually working? That is surprising even more. Viva Siesta!
"getting up in the morning" Good one. Merkel could have said that.
A vibrant economy in an agreeable climate is another misnomer. Get real, this is about Spain for Christ`s sake!
I am Jack's complete lack of surprise. What utility provides any further evidence of doom?
When the whole EU is broke... theres always Microsoft
http://www.reuters.com/article/2013/03/07/us-eu-microsoft-idUSBRE9250052...
... and death has been shown to have a beneficial effect in reducing high-blood pressure.
I have just watched Wall Street (the movie). It's all in there. Greed is good. Oliver Stone KNOWS it. If it was so predictable then, as I assume it is now, then what is the problem? My point being, life goes on. You guys with guns & gold, your fear is for nothing. The ponzi continues, into the sunset...
...until the supply lines break. The we get a real reset and a new ponzi is born. History is very clear on this.
"History of Western Civilization: A Handbook"
http://www.amazon.com/History-Western-Civilization-William-McNeill/dp/02...
Paul Krugman just tweeted that "Spain should spend massively more of what they don't have, and never stop."
I can feel their pain.
Dont' worry. The Spanish generals will make the necessary correction. Who is the general most likely to take over, readers?
The lies will continue until the end there is no other way, they know its doomed but the Micawber defence is strong in them "something will turn up"
“The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly - it must confine itself to a few points and repeat them over and over.”
? Joseph Goebbels
Let us remember that the Real Man who dreamed up the EU was none other then Herr Goebbels in 1944/45, he's the guy who laid it out for the civil servant Monnet to follow
Obviously, the situation in Spain is serious. I do understand that some adjustment is made by lower imports, an increase in unemployment and a reduction in compensation. This, with some variations, has occurred in almost all economic adjustment processes. It is true that it can not devalue its currency, which further complicates the solution. However, for me, the most serious problem is another. Its GDP fell -3.79% in 2009, -0.32% in 2010, -0.42% in 2011 and -0.6 in 2012. Instead, unemployment climbed to 26%. That means that the average productivity of Spanish worker is (or was) very low. Therefore, we reverse that unemployment should cost to this country, many years, lots of money, or a combination of both. Serious, very serious problem.
Unemployed youths and hungry people eventually revolt either with civil unrest that brings the establishemnt to it's knees or with armed revolt that brings the establishment to their maker.
I used to think that but then look at all the poor in places like the Philippines. They take it like beaten dogs.
Perhaps so will the rest of us when we realize there is nothing that can be done - you riot - they beat you - eventually they break you - and you accept that you will eat dog food (and you'll be lov'in it)
There will be no Eurobonds, never
999
(Please, be patient. September. It's election year in Germany).
Paraphrasing Kyle Bass, its not the change that is important, but its amplitude.
dareconomics.com
So, for Spain, the solution is to quit the Euro and do what ZH hates about the Fed the most, which is to print its own paper?
Am i the only one to think that ZH, despite a lot of posturing, really doesn't (and couldn't) propose any perceivable path to unfuck the status quo?
And that ZH is merely stating his(their) preference of one path to hell over another?
The status quo can not be unfucked.
It's too fucked up.
There is no solution, only a re-solution.
They, and the rest of the world, have to default.
Hyperinflation is the "civilized" way.
+1 - well, it's a guest post - from JPMorgan
nevertheless, generally speaking, in the commentaries, yes. which is hilarious if you think about it, the devaluation of your trade currency means a loss of wages purchasing power in the same way as a direct loss of purchasing power through a decrease of wages
nevertheless the wage deflation path looks more painful, feels more painful
Greenie for "unfuck the status quo"
Love how these banker boys always end up with the conclusion that fiscal transfer union will save us all. It won't. Transfer union within EZ is like Bankia. Bankia was formed by merging 7 insolvent banks in order to create one big solvent bank. What we really got was even bigger insolvent monster which itself " had to be bailed out". Break up from the €-prison start living within Your means and take the pain. Inside € there's nothing but pain.
Part of he problem in spain is a large part of the population suffers serious character flaws as were highlighted when muslims put back pack bombs on the trains and the government folded to their demands. The right thing to do was expel every muslim from the country like they did a few hundred years ago. No country neds muslims, not even one. they could not do that and remain as part of the EU, but that would be the best part.
Your name is appropriate
ZH still doesn't get it. Primary acct surplus, avg int payments expense DOWN in '12 plus '13 h1 trough for domestic demand. 25% of GDP recap for banking system already in place. Assets staring to clear nicely with improving intl investor interest. That's why the IBEX has rallied 50% from July. ZH will still be telling you to short all the way up to 10,000. Have fun...
I'm off to Spain to find a job then as you make it sound like dreamland.
The Spain trade narrative is simple.
Imports down because they need less oil/energy to not build empty cities.
Exports up, especially outside EU, in non-labor intensive industries (even agri/horticulture is becoming automated) in rank order of percent increase and value contributing to the export increases:
- petroleum destillates (U.S., Russia)
- pharma (switzerland, Ireland, i.e., re-imports)
- clothing (china and bangladesh...i.e., Spain produces cloth and sends to Asia for sewing)
- Agri (U.S., South America), basically tomatos
Spain is still far behind Germany in price-competitiveness, but has reduced labor costs across the board,even though this has had little impact on export price competitiveness since
labor input is pretty small in the total, which is why Spain can have large unemployment with some non-labor intensive industries doing well on exports. However, their exports
are not structurally sustainable. Petroleum distillates exports spiked with finished gasoline, so this will be a one-off. Pharma is probably the brightest picture, with Almirall and
other companies doing very well exporting high-value pharma. But doesn't require much labor. Clothing is iffy in the long run as cloth manufacturing is being centralized
to locales in South America and the U.S. and some degree Italy. Agri is also iffy unless Spain invests in fully automated horticulture which requires huge capex.
http://www.voxeu.org/article/export-shares-price-competitiveness-and-spa...
Scorecard: Spain 10year ylds new ytd low today. "Unsustainable"? Here's where the ZHtinhatpatrol moans about rigged markets: "we're really right, even if all our ideas loose money"!